With a June rate rise apparently off the cards, has the US Fed left it too late to normalise monetary policy?

Neil MacKinnon, global macro strategist at VTB Capital, says Yes.

The US Federal Reserve got the ball rolling by raising interest rates back in December and looked for an additional four increases this year. This was promptly shelved following the slide in markets in January. My view is that the Fed kept interest rates too low for too long and has got itself “boxed-in”. It should have started to move earlier in the cycle when the economy was stronger. Wall Street rather than Main Street has been the beneficiary of the Fed’s ultra-easy policy, but the Fed is guilty of being a “serial-bubbler” and in hock to the whims of the stock market. Now the US economy is in a late-cycle phase, with real GDP growth averaging just 1 per cent in the two latest quarters and with US corporates in a profits recession. Flip-flops in the Fed’s message undermine Janet Yellen’s credibility. In the space of six months, she has gone from hawkish to dovish to hawkish and now back to dovish. My guess is that she is running out of road and is “one and done”.

Kevin O’Nolan, portfolio manager at Fidelity Solutions, says No.

Although the recent payrolls data was weak, other measures of employment have remained robust and are consistent with meeting the employment part of the US Federal Reserve’s dual mandate. Similarly, while economic growth was weak in the first quarter of the year, the Atlanta Fed nowcast (running at 2.5 per cent) suggests that it will bounce back again this quarter. Inflation is also on the rise, with the Federal Reserve’s preferred measure of core PCE running at 2.1 per cent year-to date and likely to pick-up further if commodity prices remain at their current levels. The cycle is long in the tooth but not over and, in our view, markets are currently under-pricing the risk of further interest rate rises. That said, with other central banks still easing monetary policy, the pace of tightening will remain slow and the terminal rate is likely to be lower than in previous cycles.

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